Budget Mainstreaming for Environmental & Climate Change Policies

1. Module 7Mainstreaming in the budgetary process Country-led environmental and climate change mainstreaming

2. Implications of environment- and climate-related policies and measures for public revenue and expenditure

3. Implications of integration on the revenue side Environmental Fiscal Reform Payment for Environmental Services Carbon taxes / taxed on polluting and high-emission activities Taxes on economic activities related to environmental and climate adaptation & mitigation measures Foreign grants & other financial transfers related to environment and climate change R E V E N U E S Growth effects from increased competitiveness + - Reduced taxes on activities that shrink or fail to develop as a result of environmental and/or climate change policies Revenues

4. Public investment (capital expenditure) in environmental and/or climate change (adaptation/ mitigation) -related infrastructure Implications of integration on the expenditure side Current expenditures in relation to environmental and climate change (adaptation/mitigation) measures Subsidies for environmentally-sound and adaptation & mitigation-related activities R E V E N U E S + Expenditures - Reduced spending on health care, infrastructure replacement etc. as a result of successful adaptation and environmental measures Reduced subsidies for fuel consumption and other high-emission activities Elimination on perverse subsidies that promote environmentally damaging activities

5. Linking the budget to policy objectives and expected results

6. Linking spending to policy and results, with a medium-term outlook National objectives and strategies Medium-term sector plans Medium-term budget perspective or expenditure framework Annual budget Implementation & service delivery Performance monitoring

7. The medium-term expenditure framework (MTEF) • A forward-looking budgetary planning tool covering a 3 to 5-year period • systematically links strategic objectives (national/sectoral) and related outputs/outcomes with actions required to achieve them, corresponding expenditures and resources • supports the prioritisation of expenditures and the predictability of resources • facilitates performance monitoring • Can be established at the national level (inter-sectoral allocations) as well as the sectoral level (intra-sectoral allocations)

8. In practice • MTEFs are rather sophisticated tools, and few countries have full-fledged MTEFs • The preparation of medium-term projections of national and/or sector expenditures is a good starting point • The uncertainties associated with projections and forecasts should be recognised What is the practice in your respective countries?

9. Entry points for environmental and climate change mainstreaming

10. Basic conditions for influencing the budget • Understanding the budgeting process and finding the appropriate entry points • Coordinating with related policy processes • engaging with the actors who drive the budget • Mobilising civil society • Coordinating with donors • potential under General Budget Support • Advocacy of appropriate financing to sector and subnational bodies

11. Environment and climate change at the resource allocation stage • Mainstreaming environment/climate change requires: • reallocating funding to more vulnerable and/or priority sectors and regions • providing funding to environmental measures • providing funding for adaptation- and/or mitigation-specific plans or activities • adding environmental and climate change considerations to the criteria for screening and selecting projects and investments • making room for ‘cross-sectoral’ activities (e.g. DRR) • This process typically involves a mix of top-down and bottom-up processes Source: OECD (2009a)

12. Impacts of enhancing state of environment + CC adaptation/mitigation on economic activity & growth Impacts of CC on economic activity & growth; Value of ecosystem services Key stages in budget preparation and related entry points (1) Green accounting Extra costs of measures Extra resources required / pledged Extra revenues / cost savings Re-allocation of funds in support of environmental and adaptation/mitigation objectives

13. Instructions on costing environmental and cc (adaptation/mitigation) policies & measures Key stages in budget preparation and related entry points (2) Costing & integration of environmental and climate change policies & measures Use of environmental and climate risk screening procedures Prioritisation of environmental and climate change policies & measures Discussion of environmental and climate change policies & measures

14. Keeping track of environment- and climate-related expenditures • During budget preparation, implementation, monitoring and reporting, ‘keep track’ of main environment- and climate-related public expenditures • Adapt the budget classification • ‘Flag’ incremental environment- and climate-related expenditures embedded in ‘non-environment’ and ‘non-climate’ programmes • This is important for: • monitoring the implementation of environment- and climate-related measures in national and sector strategies • reporting to the UNFCCC (national communications) • securing eligibility for funding from specific climate adaptation/mitigation and environmental funds

15. Monitoring environment and climate finance: environment and climate markers • Statistical codes developed by the OECD (DAC) to monitor the amount of aid resources targeted at environment and climate change • Could be adapted for application to the national budgets of OECD and non-OECD countries • e.g. Kenya is introducing an Electronic Projects Monitoring System (e-PROMIS) for capturing more ‘comprehensive and structures project information’ that will make it easier to identify climate change finance Sources: OECD-DAC (2011); Norrington-Davies and Thornton (2011)

16. Public Expenditure Review (PER) Public Environmental Expenditure Review (PEER) Climate Public Expenditure and Institutional Review (CPEIR)

17. Public expenditure reviews (PERs) • A tool for analysing how budget resources are planned, allocated and actually spent across competing claims, objectives and priorities • PERs can be used as a tool for supporting the mainstreaming of climate change • Track adaptation- and mitigation-related expenditures • But also, importantly: focus on public expenditure’s overall contribution to climate-resilient, low-emission development outcomes • For environmental spending, it can take the form of a Public Environmental Expenditure Review (PEER)

18. A way of systematically assessing the equity, efficiency and effectiveness of public environmental spending. (Markandyaet al, 2006) Public Environmental Expenditure Review (PEER) • Common aspects addressed: • Levels and trends in environmental expenditure • Disaggregation of environmental expenditure by type of activity • Distribution of environmental expenditures in relation to env’tl priorities • Efficiency and effectiveness of environmental expenditures • Government capacity for budget execution • Fiscal decentralisation • Sustainability of the environmental budget • Ratios: current/capital expenditures & salary/non-salary expenditures • Links between funding sources and environmental expenditures, and potential for increasing revenues • Institutional capacity for environmental planning and management Source: Markandya et al (2006)

19. PEER example: Rwanda • 2009 PEER: • Identified low degree of environmental expenditures • Recommended MINECOFIN increase resource allocation to ENR sector • 2013 Public Expenditure Review for Environment and Climate Change 2008-2012 • Since 2004 expenditure on environment and cc increased from 0.4% to 2.5% • MINECOFIN reintroduced annex on environment and cc in National Budget Call Circular

20. Climate Public Expenditure and Institutional Review (CPEIR) • UNDP tool currently piloted in Asia-Pacific countries • Review: • how national climate change policy aims were reflected in public expenditures • how institutions might be adjusted to ensure that financing a response to climate change is delivered in a coherent way across government

21. Domestic public environmental expenditure as % of GDP (2006-09) Source: OECD (2011)

22. Government allocations to Min. Environment budget compared to other sectors, % budget (avg. 2005-09) Source: OECD (2011)

23. Public environmental expenditure in EECCA • PEE generally increasing in absolute terms, but very low as share of GDP and on per capita basis • Almost negligible compared to other social sectors • Most public expenditure (2009) to water and nature protection conservation

24. Entry points for mainstreaming climate-related aspects in a PER Sources: UNDP-UNEP (2011), World Bank (n.d.) GN4

25. Complementing with awareness raising tools • Findings of public expenditure reviews (PERs, PEERs, CPEIRs) can be complemented with ‘awareness raising’ tools to inform budgeting, e.g. • Economic analyses • Communication and advocacy strategy and work plan

26. Beyond-GDP and environmental accounting • Indicators available • e.g. Adjusted Net Savings, Sustainable Development Indicators, Green Growth Indicators, Human Development Index Source: http://ec.europa.eu/environment/beyond_gdp/indicators_en.html

27. System of Integrated Environmental and Economic Accounting (SEEA) • SEEA Central Framework - international standard by UNSC (2012) • Records: • Flows of raw materials from the environment to the economy • Exchanges of these materials within the economy • Returns of wastes and pollutants to the environment • WAVES (Wealth Accounting and the Valuation of Ecosystem Services) • WB-facilitated global partnership to mainstream natural capital accounting into national accounting system and development planning

28. Turning words into action • Mainstreaming environment and climate change in the budgetary process • Using Public Expenditure Reviews (PER), Public Environmental Expenditure Reviews (PEER) and Climate Public Expenditure and Institutional Reviews (CPEIR) What can be done and what are the institutional and capacity needs in your organisation?

29. External resources for environment and climate change financing Main sources: www.climatefundsupdate.org, UNDP-UNEP (2011)

30. Main sources of external financing for climate change (1)

31. Main sources of external financing for climate change (2)

32. Main sources of external financing for climate change (3)

33. Voluntary carbon market • Prices currently higher in the voluntary than in the mandatory market • Different certification options, e.g.

34. Transactions in the voluntary market file:///.file/id=6571367.2628763 Fuente: Forest Trends (2015)

35. Sources of external financing for environment (1)

36. Sources ofexternal financing for environment (2)

37. Sources of information on climate-related finance • www.climatefundsupdate.org • www.carbonfinance.org

38. Budget support • The transfer of financial resources of an external financing agency to the National Treasury • Provides extra resources for the national budget • either grants (e.g. EC) or loans (e.g. World Bank) • National procedures apply to the commitment and disbursement of funds • implementation via the national Public Financial Management system => reduced transaction costs, increased ownership

39. Environmentally sustainable and climate-resilient Budget support and mainstreaming opportunities Potential use of SEA 1 Existence of a well-articulated national or sectoral policy/strategy to which the budget transfer will contribute • General eligibility conditions: 2 Reasonably stable macroeconomic framework PER, PEER, CPEIR Reliable or improving public financial management 3 4 Transparency and oversight of budget

40. Budget support and mainstreaming opportunities • Inclusion of key environmental and/or climate change indicators for disbursement of: • fixed tranche • (paid in full as long as eligibility conditions are maintained) • variable tranche • (paid in full or in part based on actual performance against an agreed set of criteria and targets) • criteria/targets in principle taken from the PAF associated with the supported policy or strategy • provides a results-oriented performance incentive

41. Performance assessment indicators on climate change in Bhutan • Under GCCA a Renewable Natural Resources – Climate Change Adaptation Action Plan mainstreamed into 11th 5-year Plan (2013-2018) • Activities include budgeting exercise for cc adaptation actions • Conditions for release of variable tranche include on ‘climate change adaptation readiness’ of RNR sector’s monitoring and evaluation system and improvement of RNR statistical systems to allow for reliable collection of climate-related data

42. National climate and environment funds • Several countries have established a ‘national climate fund’ and/or an environment trust fund’ to: • channel and manage external funding related to CC and environment • leverage existing funds and initiatives (incl. those financed with national resources) • Support mainstreaming into national development strategies • Expected benefits: • Alignment of external funding with national priorities • Building of national capacities and institutions • Scaling up of the response to climate change and environmental challenges

43. Turning words into action • Promote mainstreaming through national budgetary processes • Using (EC) budget support to leverage for mainstreaming What can be done and what are the institutional and capacity needs in your country/sector of responsibility?

44. Recap – Key messages • Environment- and climate-related policies and measures can impact the national budget in multiple ways • There are entry points for mainstreaming environment and climate change at practically all stages of the budgetary process – including at the stage of ex post evaluation (PERs, PEERs and CPEIR) • It is recommended to set up systems to keep track of environment- and climate change-related expenditures • Multiple sources of funding exist to support environment and climate change – focus on eligibility and objectives • Where conditions are met, budget support is a suitable modality for supporting CC mainstreaming efforts

45. Key references • Petkova N. (2009) Integrating Public Environmental Expenditure within Multi-year Budgetary Frameworks. OECD Environment Working Papers no. 7. OECD Publishing, Paris • Carbon Finance website of the World Bank: www.carbonfinance.org • Climate Funds Update: http://www.climatefundsupdate.org/ • Markandya, A; Hamilton, K and Sanchez-Triana, E (2006) Getting the Most for the Money – How Public Environmental Expenditure Reviews Can Help. World Bank Environment Strategy Notes No. 16, September 2006. • Climate Public Expenditure and Institutional Review: http://www.aideffectiveness.org/CPEIR

46. References • Carbon Finance website of the World Bank: www.carbonfinance.org • Climate Funds Update: http://www.climatefundsupdate.org/ • Forest Trends (2013) Maneuvering the Mosaic, State of the Voluntary Carbon Markets 2013. Ecosystem Marketplace & Bloomberg New Energy Finance: Washington and New York. • OECD (2009a) Integrating Climate Change Adaptation into Development Co-operation: Policy guidance. OECD Publishing, Paris. [Read-only, browse-it edition] Available from: http://browse.oecdbookshop.org/oecd/pdfs/browseit/4309171E.PDF • OECD-DAC (2011) Handbook on the OECD-DAC Climate Markers. Organisation for Economic Cooperation and Development, Paris. Available from: http://www.oecd.org/dataoecd/56/18/48785310.pdf • UNDP-UNEP (2011) Mainstreaming Adaptation to Climate Change into Development Planning: A Guide for Practitioners. UNDP-UNEP Poverty-Environment Initiative. Available from: http://www.unpei.org/knowledge-resources/publications.html

47. References • Norrington-Davies, G and Thornton, N (2011) Climate change financing and aid effectiveness, Kenya case study. OECD, ADB. • OECD (2011) Greening public budgets in Eastern Europe, Caucasus and Central Asia. • Swanson, A and Lundethors, L (2003) Public Environmental Expenditure Reviews (PEERS), Experience and Emerging Practice. World Bank Environment Strategy Papers No. 7. • World Bank (n.d.) Mainstreaming Adaptation to Climate Change in Agriculture and Natural Resources Management Projects. World Bank, Washington, DC. Guidance Note #4 – Developing Readiness for Institutional Capacity Development and an Enabling Policy Framework. [Online] Available from: http://climatechange.worldbank.org/climatechange/content/mainstreaming-adaptation-climate-change-agriculture-and-natural-resources-management-project